Insider Trading Case Links Golfer, Banker and Gambler

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Preet Bharara, the United States attorney in Manhattan, announced criminal charges against the ex-chairman of Dean Foods and a high-rolling sports gambler.CreditCreditLouis Lanzano for The New York Times

Phil Mickelson has five major golf championships and countless endorsement deals. Thomas C. Davis, a former investment banker, has a Harvard pedigree and a country club lifestyle.

They also had a secret.

Both men owed money to William T. Walters, a high-rolling Las Vegas kingmaker, often considered the most successful sports bettor in the country.

Now, federal authorities say those debts were at the center of a long-running insider trading scheme.

Federal prosecutors in Manhattan on Thursday unveiled criminal charges against Mr. Walters, saying that illegal stock tips from Mr. Davis helped him generate some $40 million in profits and avoided losses. They also charged Mr. Davis, who has agreed to plead guilty and who is cooperating against Mr. Walters.

Mr. Mickelson was not accused of wrongdoing. But the Securities and Exchange Commission listed him in a civil complaint as a relief defendant, arguing that he was “unjustly enriched” and must disgorge “ill-gotten gains” he made from trades Mr. Walters recommended. Mr. Mickelson, known as “Lefty,” agreed to repay nearly $1 million, and his lawyer said he “takes full responsibility for the decisions and associations that led him to becoming part of this investigation.”

The investigation hinged on Mr. Davis’s mounting debts, which were far larger than Mr. Mickelson’s and which may have provided a motive to share inside information.

Mr. Davis retired from investment banking at Credit Suisse First Boston in 2001, the government said, but not from the free-spending lifestyle it enabled. His finances were so troubled, the authorities said, that he even misused money from a charity.

Mr. Walters also lent him money. Mr. Davis, then the chairman of Dean Foods, returned the favor by feeding Mr. Walters boardroom secrets as far back as 2008, the authorities say.

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William T. Walters, who goes by “Billy,” is often considered the most successful sports bettor in the country.CreditJessica Ebelhar/Las Vegas Review-Journal, via Associated Press

To disguise the scheme, they said, the two men used disposable cellphones and created “a secret code” for discussing Dean Foods, a Dallas company, referring to it as “the Dallas Cowboys.”

“Davis breached his duty and broke the law as the result of being in dire financial straits,” Andrew J. Ceresney, the head of the S.E.C.’s enforcement division, said at a news conference on Thursday. And Mr. Walters, who was arrested at a resort in Las Vegas late Wednesday, was “gambling on a sure thing.”

The case, however, is much broader than a story about gambling debts. The charges represent one of the most notable insider trading prosecutions since a federal appellate court overturned two prominent convictions — a ruling that led to the dismissal of about a dozen other convictions.

After the United States Court of Appeals for the Second Circuit overturned the convictions of two hedge fund managers, Todd Newman and Anthony Chiasson, in December 2014 — and in the process imposed the greatest limits on prosecutors in a generation — the government predicted a chilling effect on future insider trading investigations. Preet Bharara, the United States attorney in Manhattan, who led a sweeping crackdown on insider trading, warned that the ruling could allow “a potential bonanza for friends and family of rich people.”

But in charging both Mr. Walters and Mr. Davis with securities fraud and wire fraud, his office and the S.E.C. are sending a message that these cases can still be made.

“Brazen insider trading continues to be a blot in our securities markets, and so the integrity of our markets continues to be a priority for this office,” Mr. Bharara said at the news conference. Still, he added that “there is conduct that we think is nefarious and undermines faith in the market and undermines the strength of the market that will not be able to be prosecuted because of the Newman decision.”

Mr. Walters’s lawyer said his client had done nothing wrong. “Bill Walters is a true American success story, whose extraordinary accomplishments as a lawful sports gambler have been widely recognized and lauded,” the lawyer, Barry Berke, said in a statement. “Mr. Walters and his counsel look forward to his day in court.”

This is not the first time Mr. Walters, who is 69, has been the subject of a criminal investigation. He has faced charges four times, none of which resulted in a conviction.

The latest investigation of Mr. Walters centered largely on trading in shares of Dean Foods, the nation’s largest milk processor, and its decision to spin off a subsidiary.

Days after learning of the planned spinoff in 2010, Mr. Davis flew to Las Vegas to meet with Mr. Walters. On the next business day, Mr. Walters purchased a million shares of Dean Foods.

The deal was delayed. But two years later, while at his country club, Mr. Davis dialed into a Dean Foods conference call to discuss a renewed spinoff effort.

Three minutes after the call ended, Mr. Davis rang Mr. Walters. Nine minutes after that, Mr. Walters called his stockbroker to buy more shares.

Mr. Walters also called Mr. Mickelson and recommended that he buy shares in Dean Foods. At the time, Mr. Mickelson owed money to Mr. Walters on a gambling debt. The S.E.C. said some of the nearly $1 million in trading profit Mr. Mickelson made on shares of Dean Foods went to reimburse Mr. Walters.

Mr. Mickelson, who has a reputation for betting on sports, may not have known the origins of the tip. But on at least two occasions, the F.B.I. contacted Mr. Mickelson to seek his cooperation in the case against Mr. Walters, people briefed on the investigation have previously said. Once, agents approached him on a golf course, another time at an airport hangar.

At Thursday’s news conference in Lower Manhattan, the S.E.C. displayed a chart with the heading: “Mickelson’s Trades in Dean Foods.”

Gregory Craig, a lawyer for Mr. Mickelson, described the three-time winner of the Masters golf tournament as “an innocent bystander.”

“Phil understands and deeply respects the high professional and ethical standards that the companies he represents expect of their employees, associates and of Phil himself,” Mr. Craig said in a statement. “He subscribes to the same values and regrets any appearance that, on this occasion, he fell short.”

Through all the illicit trades that underpin the case against Mr. Walters, Mr. Davis was the common thread.

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Phil Mickelson was not accused of wrongdoing. But the S.E.C. listed him in a civil complaint as a relief defendant.CreditJeff Haynes/Reuters

In addition to the 2012 spinoff, Mr. Davis provided Mr. Walters with “sneak previews” of at least six quarterly earnings statements for Dean Foods, the S.E.C. said.

Authorities say that Mr. Davis also tipped Mr. Walters to a not-yet-public activist campaign by a group of hedge fund investors who were looking to shake things up at Darden, which owns restaurant chains including Olive Garden and LongHorn Steakhouse.

In the summer of 2013, Mr. Davis was approached by a representative of the group about its intention to acquire shares in Darden. Mr. Davis signed an agreement that he would keep the plans confidential but he told Mr. Walters nonetheless, authorities said.

Mr. Davis also “misappropriated” $100,000 from a charity he ran that raised money for a battered-women’s shelter in Dallas, according to the court filings. He took the money to pay down a gambling debt at a Las Vegas casino.

The charges against Mr. Davis include perjury — authorities said he lied to the S.E.C. during a deposition last year — and obstruction of justice because he “corruptly altered” and destroyed evidence in May 2014 when news of the investigation first emerged. Mr. Davis resigned as chairman of Dean Foods last August.

Thomas M. Melsheimer, a Dallas lawyer representing Mr. Davis, said his client was “pleased to be assisting the government in its investigation.”

The case against Mr. Walters comes as prosecutors reassess their ability to bring insider trading cases. The appeals court ruling constrained the pursuit of cases involving the sharing of inside information between friends. Specifically, the appeals court required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The case against Mr. Walters addressed the issue of “pecuniary” gain head-on. The 40-page indictment not only details Mr. Walter’s longtime friendship with Mr. Davis — they first met 20 years ago on a golf course — but that he had entered into numerous business deals and personal loans with him.

They invested in a software company together. Mr. Walters arranged for a friend to provide Mr. Davis with a $625,000 personal loan. And as Mr. Davis fell deeper into financial trouble, Mr. Walters helped bail him out with a $350,000 loan that was never repaid.

“It’s a straightforward announcement that the Southern District is still in the insider trading prosecution business,” said Daniel Richman, a former federal prosecutor, who is now a professor at Columbia Law School. “It’s also a reminder that however important Newman is, if the facts are there, you can take on the burden of proving precisely the kind of exchange that Newman demanded.”

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Insider Trading Case Links Golfer, Banker and Gambler. Order Reprints | Today’s Paper | Subscribe